Saturday, November 19, 2005

Business Plans for Start-ups

Knowledge Oasis Muscat runs The Knowledge Mine - TKM -(pictured are the 8 start-ups based in TKM) - a business incubator program. Indeed, we regularly have young entrepreneurs requesting pre-incubation advice. In particular, questions related to business plans. As a response, we've pieced together the following business plan guidelines.Business Plan for BoldIdea LLC

o Summary of Business PlanAn Executive Summary - a one-pager on what BoldIdea is all about. Hammer home BoldIdea’s WOW Factor. Think of it as a Lift Pitch, because if you can't explain your idea to someone in a one minute climb from the ground to fifth floor your target will be out of the doors and gone. If you pull it off, you'll be off to a flyer with them licking their lips and reading on.

Start with a one liner - your strapline - that really sums up BoldIdea so that your reader instantly 'sees' where you're at.

o ManagementDetail BoldIdea’s management and/or business experience and team members – include your CVs here. Make sure you clearly set out the roles and responsibilities of each team member and how they fit together. What are their strong and weak points? Make sure you know this before deciding who does what.

o From Idea to RealityHere’s where you detail all the nuts and bolts of BoldIdea - like premises (location), key partners, suppliers, IT, etc. Where’s the nerve centre going to be? Your home? Rented commercial premises - office space, a shop, a warehouse? Will your premises give access to BoldIdea’s key markets, good communications, such as Internet access and public transport for your clients?

What raw materials, equipment, facilities and other hardware does BoldIdea need? How will you get the raw materials? Who are your suppliers? Are they any good with a solid track record? How are you going to sell the product/service – from a shop, wholesaler, distributor? What are they like? Quality is key. How will yours be checked and maintained? It’s no good designing a product/service if it falls apart after five minutes. No-one will come back for more.

o Product: A Technical ExplanationGive a credible description of what BoldIdea’s product/service is, how the idea of BoldIdea works and what it will do for its clients that will make it worth paying for. Keep this short and to the point. Remember, clients are less interested in how clever you are than how well you can serve their needs.

o Market ResearchPut yourself in your clients’ shoes when giving details of BoldIdea’s products. Think of it as they would think of it. Tell them why they won’t be able to do without your product/service now and in the future. This shows you really understand your market which is what often makes a successful idea stand out. But keep it simple. If you need to talk ‘techie’ then put it at the end of your plan. What’s BoldIdea’s USP? What gives BoldIdea the edge on its competitors? How is BoldIdea different from its competitors?

Do you have any patents or copyright (register the name – website etc)? Address any of these so-called intellectual property issues. Can your competitors copy all the new things you are offering easily?

You may want to attach a ‘Features and Benefits’ analysis at the back of the plan, perhaps covering BoldIdea’s manufacturing process and any other life and death factors.

o MarketingYou will need to know BoldIdea’s market and how you will promote BoldIdea to your clients. Spell out where you are now - new market, mass market (everybody wants BoldIdea!), niche market (you’ve only 3 clients in the whole Gulf). How big’s your market, what’s its history and where does BoldIdea fit in? Is it likely to shrink, grow or stay the same? Your aim must be precise. Who exactly is your target customer or client? Research this.

Winning new clients and keeping your existing clients will be crucial. How will you do it?You must know your competitors intimately. What are their strengths and weaknesses? How is BoldIdea different or better? How is the BoldIdea brand better?

Where are the gaps in the market and what is BoldIdea going to do about them?

Your marketing mix could be your money-spinner. So how are you going to position yourself in your market? Key strategies are:

Price. The Rials you expect your clients to pay is critical. Will you undercut your competitors or up the price knowing that all your extras provide value for money? How will your pricing policy affect the business - will you make any profit? How will your competitors react? After all, you are stealing their trade and they may launch a fierce battle to protect themselves, like slashing their prices.

Place. Can your clients get to you easily? Do they need to?

Promotion. How are you going to reach your target clients? If you believe that all you have to do is make it and they will come, you may be shocked when they don’t. Don’t make the fatal mistake in believing that BoldIdea is so cool and clever that it’ll sell itself. Cover all your options including advertising, public relations, direct mail, branding, networking etc.Product. Why is BoldIdea’s product/service better than your competitors? Have you got that award-winning designer, the super-quality support service, the cool distribution channel? How will it develop in the future? How will BoldIdea move with or set the trends?

o Short and Medium-term ObjectivesWhat are your objectives for BoldIdea year one and for the next two to three years? For example, what targets do you want to achieve, what turnover or how many people do you hope to employ?

o Sales ForecastsIs anyone going to buy BoldIdea’s product/service? Here’s where the numbers game kicks in. How many pieces will you sell? How many potential clients do you really have? And how much of your product/service are they likely to buy? Be realistic. How does this breakdown on a month-by- month basis?

o Financial Documents – P&L and Cash Flow ForecastSales may be great, but are you making a profit? Just because BoldIdea’s product/service is selling faster than you can churn it out doesn’t mean that you’re going to make any money at the end. So when it comes to piecing together a Profit and Loss (P&L) and Cash Flow Forecasts be realistic with your numbers.

Expenses/OverheadsMake sure you cover any fixed and variable expenses you have over the accounting year. These might include:

o Rents. Show how much you’ll be paying each month. If you pay your rent annually, you’ll need to divide it up evenly across each month.

o Utilities. How much are you likely to pay for water, AC, lighting, gas, etc each month?

o Telephone/Internet. When will you have to pay these bills?

o Insurance. BoldIdea may need: fire or liability insurance, life insurance, shipping insurance, employee insurance. How much will these be?

o Drawings. As your manning the ship, how much are you going to pay yourself each month? You will need something to live on.

o Salaries. How much will you pay your staff?

o Interest. If you’re borrowing cash to make BoldIdea work, what are your interest payments each month?

o Depreciation. Even the best equipment gets old and dies. Work out the value of your assets at the beginning of the year and how much they’ll depreciate by at the end of the year. The depreciation period can vary, e.g. your delivery van may be depreciate at a different rate to your desk.

Crunching NumbersNow you need to put all this on paper to see if BoldIdea really can work. You need to think about:

1. Is BoldIdea going to make a profit, and

2. How much cash does BoldIdea need to make it happen and how long will it take BoldIdea to earn it back?

Profit/Loss Forecast (P&L)Every business has to have a P&L. It’s not rocket science! At its simplest, this is the difference between what money you’ve got coming in and what you are spending. So:

Profit = Sales (income) less Costs (spending)

Your Sales/Income is everything that you will make from all sources over your working year. If you’re a photographer this could cover everything from weddings to sales from your exhibition.

Your costs are everything that you need to buy/hire/rent to make your idea happen in the same working year. This includes your Direct Costs (like raw materials, transport, etc) and your Fixed Costs and Overheads (like phones, office rent, heating, etc).

This produces your Net Profit. Now you know if YOUR idea’s worth it!

Cash Flow ForecastWhen cash will come in and when it will go out (Cash Flow Forecast). Just because you invoiced in April, doesn’t mean you’ll be paid in April. Chances are you won’t get paid until May, or June… if not later. So you need to show how much BoldIdea needs to keep afloat until the cheques start rolling in and that you’ve got the cash to cover your costs. In brief, just how much cash do you need to make BoldIdea work?

To work it out you need what’s known as a Cash Flow Forecast. It does look complicated so you need a simple system to work it out for your idea.

Follow these steps:

Step 1: Set up a simple table with one column for each of the next 12 months.

Step 2: Work out your Sales/Income - who is likely to buy your product/service or time in the first year and how much cash this will produce each month. Think carefully about when they will actually pay you.

Step 3: Enter your most realistic projections of your income/sales into your table. Think about when you will actually get paid for all the work you’re going to do.

Step 4: Now work out your Direct Costs (like materials, transport, etc) and when you’ll have to pay for them so you won’t disappoint your clients/clients. Expect to pay for these in advance as you are a new business. Think about the smallest amount you’ll need to pay out to finish the job.

Step 7: Now plot them against the headings most relevant to your idea and put them into your monthly table.

Step 8: Finally, work out your One-Off Costs that you need to cover to get started (like IT equipment, cars, etc).

Step 9: Enter these into your table in the month that you are likely to have to pay for them.

Step 10: All you have to do now is total up all the different costs for each month and take them away from all your sales/income received. You now know how much cash will move in which direction if your business lives up to your realistic projections.

The last thing you’ve got to do is enter the amount of money you will start with – your opening balance - and add (or take away if it’s negative) your cash flow for each month. Now you know what cash you need to make your idea work. You’ll also know how much investment your baby needs and have a clear idea of when you will make enough money to pay it back.